Control Number : Item Number: 36. Addendum StartPage : 0

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Control Number : 41061

Item Number: 36

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PROJECT NO. 41061

2013 FEB 16 Pli 2: 59

PUC RULEMAKING REGARDING

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PUBLIC UTILITY COMMISSION

DEMAND RESPONSE IN THE

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ELECTRIC RELIABILITY COUNCIL

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OF TEXAS (ERCOT) MARKET

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OF TEXAS

COMMENTS OF CPS ENERGY

CPS Energy' files these comments in response to the Public Utility Commission of Texas (PUCT) request for comments in Project 41061 regarding Demand Response (DR) in the Electric Reliability Council of Texas ("ERCOT") market.

Introduction

The demand side of a market is a critical component. When demand can respond

to changes in price, the efficiency of the applicable market is improved as consumers demonstrate their preferences. Therefore, improvements in DR can improve the

functionality of the ERCOT market. CPS Energy supports the development of DR in the ERCOT market and has made significant investments to that end within its service area. However, details concerning the design and implementation of DR are important in achieving success or failure. Consequently, the design of DR programs must be

consistent with the overall market. Allocation of DR costs should also be consistent with cost causation principals and not be uplifted to the market indiscriminately.

1. Increasing DR in ERCOT

' CPS EnergyTM is the trade name of City Public Service of San Antonio, acting by and through the City Public Service Board.

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• What additional products and programs could ERCOT develop to facilitate DR? How should the programs be designed?

ERCOT's role should be limited to facilitating the incorporation of programs into the market and not be a designer of products and programs with one notable exception: DR products for the sole purpose of reliability. ERCOT has successfully incorporated many such products, but for DR to gain in effectiveness it is the Load Serving Entities (LSEs) who must design and build products and programs.

• Should economic incentives be developed to stimulate large DR programs and if so, should the incentives be market based or load-ratio share based obligations?

The best incentive to encourage the development of DR programs is for market prices to reflect scarcity conditions based on the Value of Lost Load (VOLL). This would qualify as a market based incentive. Load-ratio share based obligations are particularly troubling especially when coupled with a capacity payment.

Currently the ERCOT wholesale market design reserves capacity payments for reliability services such as Ancillary Services (AS) and Emergency Response Service (ERS). If one extended this capacity payment structure to C)R, but not to all resources, it would undermine the market design and give preferential treatment to one resource over another. Even more damaging to the market would be to then uplift the cost of a capacity payment to load in general.

The damage is easy to illustrate in the context of resource adequacy. Assume that there are two LSEs in a market. LSE I procures enough resources to cover its load and a reserve margin. LSE 2 procures slightly less resources than it needs on a forward basis and covers the rest in the real time market. Both strategies are reasonable within differing risk tolerances. Absent any intervention the risks and rewards of the two strategies are properly aligned. LSE I has price certainty and coverage if its load is greater than expected. LSE 2 may pay a lower rate, but it is exposed to real-time volatility. However, if there is external intervention to procure additional resources to cover LSE 2 shortfall (such as a DR backstop) and the cost of that procurement is allocated to all LSEs on a load ratio share basis, problems arise. Never mind that

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LSE I is covered; it still receives a load ratio share of the cost of the DR backstop which effectively subsidizes LSE 2 short position. LSE 1 acted appropriately relative to the resource adequacy objectives. Yet it was financially punished to the benefit of its rival. In the next iteration of this market, LSE I is less likely to contract forward for as much of its load as previously. Departing from cost causation standards not only results in cross-subsidies, but it undermines the resource adequacy goal. When it comes to resource adequacy, load ratio share uplift should be avoided in the procurement of any resource including DR.

• What regulations are needed to ensure residential and small commercial customers are adequately protected when participating in aggregated DR programs?

The cost of DR should be allocated on a cost causation basis, and self-provision of any DR requirements should be allowed.

• How can advanced metering systems (AMS) and related technology support DR in residential and small commercial customer classes?

CPS Energy has no comment on this issue at this time. CPS Energy reserves the right to comment further in the future.

II. Incorporating DR in Wholesale Markets

Forecasting

• How are existing ERCOT, LSE, and utility DR programs forecasted in forward demand and resource adequacy projections? How could DR programs be better reflected?

CPS Energy has no comment on this issue at this time. CPS Energy reserves the right to comment further in the future.

• How do price-based DR incentives offered by LSEs contribute to load forecasting errors? What other pricing and rate structures impact the wholesale market?

Price-based DR may contribute to load forecasting errors by not materializing in the historic data that ERCOT and others use to forecast load. However, as DR based load curtailment enters the historical data set it would it would not contribute to load forecast error. Voluntary

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Demand Response is part of an efficient market, and any impact would be consistent with good market design. The voluntary curtailment programs are not the ones that negatively impact the wholesale market. Instead, the programs where DR receives a capacity payment and then gets deployed at ERCOT instruction cause the problems. This problem exists when any resource receives a capacity payment not just DR.

Pricing

• What mechanisms could ensure that DR deployments appropriately contribute to price formation rather than price reversal?

Loads in Security Constrained Economic Dispatch (SCED) would be the best answer. However, from a resource adequacy perspective, voluntary curtailments by loads that do not receive capacity payments are not a problem. In fact, such resources contribute to a more efficient market.

• Do the Real-Time Market Enhancement and/or Hour-Ahead Market proposals submitted

by the Market Enhancement Task Force (METF) to the Technical Advisory Committee (TAC) offer an appropriate framework for the participation of DR in the ERCOT market?

Both proposals would enhance participation in the market; however, the mechanisms are very different. The Hour-Ahead Market (HAM) does so by offering loads a closer to real-time opportunity to participate in a financially binding (but not physically binding) market. Each market participant would act on its best information at

the time to make a decision. With the real-time market enhancements, ERCOT would

look ahead and, based on their view of the market, deploy resources. The deployed

resources would. receive a guarantee of a minimum payment. Also noteworthy, the

market enhancement proposal would be a closer step toward loads in SCED.

CPS Energy thanks the Commission for the opportunity to file these comments.

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February 15, 2013

Respectfully submitted, CPS ENERGY

P.O. Box 1771

San Antonio, Texas 78296-1771 (210) 353-6832 (Facsimile) (210) 353-5689

Kenan Ogelma

Director, Energy Market Policy kogelman@cr)senerev.com

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